RBI Raises Loan-to-Value Ratio on Gold Loans Below ₹2.5 Lakh to 85%: What It Means for Borrowers and Lenders

By Newsroom TV Live Jun 9, 2025, 10:32 IST

In a landmark decision aimed at enhancing access to credit and supporting small borrowers, the Reserve Bank of India (RBI) has announced an increase in the loan-to-value (LTV) ratio for gold loans up to ₹2.5 lakh. The LTV ratio for this segment has been raised from 75% to 85%, allowing borrowers to avail loans worth up to 85% of the market value of their pledged gold. This move is part of a broader effort by the central bank to simplify lending norms, encourage financial inclusion, and provide relief to customers relying on gold loans for urgent financial needs.

Understanding Loan-to-Value Ratio and Its Importance

The Loan-to-Value ratio is a crucial parameter in secured lending. It represents the maximum loan amount that a lender can disburse against the value of the collateral offered by the borrower. In the context of gold loans, the LTV ratio determines what percentage of the gold’s current market value can be sanctioned as a loan.

For instance, if a borrower pledges gold valued at ₹1 lakh, an LTV of 75% means the loan granted would be ₹75,000. By increasing this ratio to 85%, the loan amount rises to ₹85,000 for the same quantity of gold. This enhancement significantly benefits small borrowers by allowing them access to more funds without needing to pledge additional collateral.

The Revised LTV Structure and Its Impact

The RBI’s new guidelines introduce a tiered LTV structure based on the loan amount:

For gold loans up to ₹2.5 lakh, the LTV ratio has been increased to 85%.
For loans above ₹2.5 lakh and up to ₹5 lakh, the LTV ratio remains at 80%.
For loans above ₹5 lakh, the LTV ratio continues to be capped at 75%.

This tiered approach aims to balance the twin objectives of facilitating greater credit flow to small borrowers while managing the risk exposure associated with higher-value loans.

Why Focus on Smaller Gold Loans?

Gold loans have long been a preferred source of quick credit, especially among rural and semi-urban households that may have limited access to formal banking channels. Many such borrowers rely on their family’s gold jewelry as collateral to meet urgent financial requirements such as medical expenses, education fees, or agricultural needs.

By raising the LTV ratio specifically for loans up to ₹2.5 lakh, the RBI is signaling its intent to ease borrowing conditions for the more vulnerable and financially excluded segments of society. This move will enable smaller borrowers to unlock higher credit amounts without increasing their gold holdings, thus improving liquidity and easing their cash flow constraints.

Benefits for Borrowers

Higher Loan Amounts: Borrowers can avail themselves of increased funds without pledging additional gold, making it easier to meet urgent financial needs.
Simplified Loan Process: Along with the increase in LTV, the RBI has also relaxed certain documentation requirements for smaller gold loans, reducing paperwork and processing time. This simplification lowers barriers for first-time or low-income borrowers.
Financial Inclusion: The enhanced LTV promotes the integration of small borrowers into the formal credit system, which can help build credit histories and improve access to other financial products in the future.
Lower Reliance on Informal Lending: Access to formal gold loans at better terms may reduce dependence on local moneylenders who often charge exorbitant interest rates.

Implications for Lenders

For gold loan providers, including banks and non-banking financial companies (NBFCs), the revised LTV norms offer both opportunities and challenges:

Expanded Customer Base: Higher permissible LTV ratios allow lenders to serve a larger pool of small borrowers, many of whom were previously underserved due to lower loan limits.
Increased Business Volume: With more customers qualifying for bigger loans, lenders can expect growth in their gold loan portfolios, potentially driving revenue and market share.
Risk Management Needs: Higher LTV means a greater percentage of the loan amount relative to collateral value, which could increase credit risk if gold prices fluctuate or if borrowers default. Lenders will need to strengthen their risk assessment, monitoring, and recovery mechanisms.
Competitive Pressure: The change may intensify competition among lenders, compelling them to innovate with customer service, interest rates, and loan terms to attract and retain clients.

Collateral Valuation and Gold Price Considerations

A key aspect of gold loans is the valuation of the pledged gold. Since gold prices are subject to daily market fluctuations, lenders typically use the lower of the last closing price or the average closing price over the previous 30 days to determine the collateral’s value.

By setting the LTV limit based on this conservative valuation method, the RBI aims to protect lenders from overexposure due to sudden price dips, thereby maintaining the security of the loan portfolio.

However, this also means that borrowers need to be mindful that the loan amount sanctioned may vary with the prevailing gold prices. For borrowers who rely heavily on gold loans, market volatility could affect their borrowing capacity and repayment schedules.

Regulatory Perspective and Safeguards

The RBI’s move reflects its ongoing commitment to balance credit growth with financial stability. The central bank continues to emphasize that while increasing access to credit is vital, safeguarding the interests of both lenders and borrowers remains paramount.

The RBI mandates that lenders follow responsible lending practices, including proper assessment of borrower repayment capacity and transparent communication of terms. For loans up to ₹2.5 lakh, simplified documentation does not mean leniency on eligibility checks but aims to reduce unnecessary procedural burdens.

Moreover, the tiered LTV structure itself acts as a safeguard, with stricter limits for higher-value loans to contain systemic risks.

Economic and Social Implications

The increase in the LTV ratio is expected to have several positive ripple effects across the Indian economy and society:

Boost to Rural Economy: Many small borrowers belong to rural and semi-urban areas, where agriculture and allied activities are predominant. Access to higher credit through gold loans can support farmers during sowing or harvesting seasons, purchase of inputs, or emergency needs.
Women Empowerment: Gold jewelry is often held by women as part of family wealth. Easier access to gold loans empowers women by enabling them to leverage these assets for financial needs, promoting economic participation.
Encouraging Savings in Gold: Gold remains a preferred investment and saving option in India. The new policy may encourage more households to save in gold, knowing it can be used as collateral for higher loans.
Reduction in Informal Credit: Formal gold loans at competitive rates can reduce dependency on informal credit channels that charge higher interest, thus improving household financial health.

Challenges and Areas for Improvement

Despite the clear benefits, certain challenges remain:

Price Volatility: Fluctuating gold prices can create uncertainty for both borrowers and lenders, affecting loan amounts and repayment burdens.
Credit Discipline: Easy access to credit must be balanced with borrowers’ ability to repay. Overborrowing or defaults could impact the sustainability of gold loan schemes.
Awareness and Literacy: Many small borrowers may lack awareness of the new norms or may not fully understand the implications of higher LTV ratios, necessitating financial literacy initiatives.
Technology Integration: To truly simplify loan processing and documentation, lenders need to leverage digital platforms, enabling faster and more transparent transactions.

The RBI’s decision to hike the LTV ratio for smaller gold loans is a welcome step towards democratizing access to credit and supporting economic resilience among the financially vulnerable. It reflects a nuanced approach that recognizes the importance of gold loans as a vital financial instrument in India.

As lenders implement the revised norms from April 2026 onwards, close monitoring of the impact on borrower behavior, loan performance, and gold loan market dynamics will be essential. The policy is likely to encourage innovation in product offerings, customer engagement, and risk management in the gold loan segment.

Overall, the increased LTV ratio is poised to be a game-changer for millions of Indians who depend on gold loans as a reliable source of timely credit. By striking the right balance between financial inclusion and risk mitigation, this move strengthens India’s credit ecosystem and contributes to inclusive economic growth.